Tyler Senackerib – FinReghttps://www.finregreform.com
Davis Polk Insights on Financial RegulationThu, 12 Sep 2019 22:17:11 +0000en-UShourly1https://wordpress.org/?v=4.9.11https://finregreform.davispolkblogs.com/wp-content/uploads/sites/32/2017/11/cropped-favicon-32x32.pngTyler Senackerib – FinReghttps://www.finregreform.com
3232CECL Delayed for Small and Private Companies, But 2020 Implementation is Likely Here to Stayhttps://www.finregreform.com/single-post/2019/07/19/cecl-delayed-for-small-and-private-companies-but-2020-implementation-is-likely-here-to-stay/
Fri, 19 Jul 2019 18:38:53 +0000https://www.finregreform.com/?p=4852Continue Reading…]]>The Financial Standards Accounting Board (FASB) voted on Wednesday to propose delaying the implementation date of the Current Expected Credit Losses accounting standard (CECL) until 2023, for all companies other than larger SEC filers. The proposal would reduce the number of implementation dates from three to two.

Under the proposal, companies that must file or furnish financial statements with the SEC and which, in the most common fact pattern, have a market capitalization of more than $250 million would still be required to implement CECL for fiscal years beginning in 2020. Other less common fact patterns are set forth in the technical description of the SEC definition of smaller reporting companies.[1]

All other entities subject to CECL, including public business entities that are not larger SEC filers, smaller reporting companies, private companies, not-for-profits and employee benefit plans, would see CECL implementation delayed until fiscal years beginning on or after 2023, rather than 2021 or 2022. In the banking sector, all credit unions, many privately held banks and a wide range of community banks with a very small float may benefit from this delay. But, it is extremely unlikely that the top 200 banking organizations by asset size would benefit, meaning that all large banking organizations, all regional banking organizations and most, but not all, of the larger community banks would not benefit from this delay.

In light of the fact that CECL implementation for larger SEC filers is less than five months away, the proposal suggests that FASB intends to stand by CECL’s initial implementation date of 2020, despite calls by many stakeholders for delay.

The full proposal will be released in the coming weeks and subject to a 30-day comment period.

[1]A “smaller reporting company” is an issuer that is not an investment company, asset-backed issuer or a majority-owned subsidiary of a parent that is not a smaller reporting company, and that (i) had a public float of less than $250M or (ii) had annual revenue of less than $100M and either (a) no public float or (b) a public float of less than $700M. 17 U.S.C. § 229.10(f)(1).

]]>Visual Memorandum: SEC’s Security-Based Swap Capital, Margin and Segregation Ruleshttps://www.finregreform.com/single-post/2019/07/12/visual-memorandum-secs-security-based-swap-capital-margin-and-segregation-rules/
Fri, 12 Jul 2019 22:02:04 +0000https://www.finregreform.com/?p=4817Continue Reading…]]>On June 21, 2019, the SEC adopted security-based swap (SBS) capital, margin and segregation requirements (the SEC Rules) for SBS dealers (SBSDs) and major SBS participants, revised the capital and segregation requirements for broker-dealers that are not SBSDs to the extent they engage in SBS activities, and increased the minimum capital requirements for broker-dealers authorized to use internal models to compute net capital. The SEC Rules do not start the registration or compliance clock for SBSDs.

The SEC Rules are a key final rule in the suite of capital, margin and segregation rules under Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, along with the margin and segregation requirements for swap dealers (SDs) previously adopted by the CFTC (the CFTC Rules) and the capital, margin and segregation requirements for SBSDs and SDs previously adopted by the U.S. prudential regulators (the PR Rules). While the SEC Rules, and the margin requirements under the SEC Rules in particular, reflect significant efforts to harmonize the requirements for an SBSD with those under the CFTC Rules for an SD, some key differences remain.

Our visual memorandum describes the SEC Rules in detail, with a focus on the circumstances under which a firm is subject to the SEC Rules, CFTC Rules and PR Rules—or more than one of these rule sets.

]]>Davis Polk Visual Memorandum: SEC Adopts Regulation Best Interest, Form CRS and Related Advisers Act Interpretationshttps://www.finregreform.com/single-post/2019/06/21/davis-polk-visual-memorandum-sec-adopts-regulation-best-interest-form-crs-and-related-advisers-act-interpretations/
Fri, 21 Jun 2019 20:12:55 +0000https://www.finregreform.com/?p=4778Continue Reading…]]>The SEC adopted its long-awaited Regulation Best Interest, establishing new standard of conduct regulations for SEC-registered broker-dealers and their associated persons that are natural persons. At the same time, the SEC adopted (i) a new relationship summary disclosure requirement, on Form CRS, for broker-dealers and investment advisers who offer services to retail investors and (ii) two interpretive releases—one on the investment adviser fiduciary duty and the other on the solely incidental exemption for broker-dealers from the investment adviser regulations.

Our visual memorandumdescribes the final rule and interpretations in detail, focusing on synthesizing the SEC’s extensive commentary on compliance with these regulatory requirements.

]]>Public Memorandum | Federal Reserve’s Proposed Rule on Controlling Influence: A Step in the Right Directionhttps://www.finregreform.com/single-post/2019/05/02/public-memorandum-federal-reserves-proposed-rule-on-controlling-influence-a-step-in-the-right-direction/
Thu, 02 May 2019 20:27:54 +0000https://www.finregreform.com/?p=4658Continue Reading…]]>The Federal Reserve has requested comment on a highly anticipated notice of proposed rulemaking to amend its regulatory framework for deciding when a company exercises a controlling influence over another company under the Bank Holding Company Act and the Home Owners’ Loan Act.

The proposal is a welcome step in the right direction. It would provide greater transparency, certainty and predictability, and relax some of the limits and restrictions in the Federal Reserve’s existing practices and precedents. It is also more consistent with the ordinary meaning of the words “controlling influence,” as well as the text and legislative history of the 1970 amendment that added the controlling influence test to the BHC Act. But the proposal stops short of being fully consistent with those legislative standards, which indicate that the standard for a controlling influence determination is supposed to be actual control, not merely potential control.

Our public memorandum describes the proposal in detail, focusing not only on the proposed framework of rebuttable presumptions and related definitions and technical provisions, but also on how that framework compares to the Federal Reserve’s existing practices and precedents and to the congressionally intended standard of actual control.

]]>Bank Pay Rules May Be Resurrectedhttps://www.finregreform.com/single-post/2019/03/12/bank-pay-rules-may-be-resurrected/
Tue, 12 Mar 2019 21:30:36 +0000https://www.finregreform.com/?p=4477Continue Reading…]]>U.S. federal banking regulators plan to revive efforts to regulate financial institution incentive compensation, as required under Section 956 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act). The Wall Street Journal reports that the current effort is in its “early stages” and is being led by “top officials” of at least the Federal Reserve, the FDIC and the OCC. The article notes, “spokesmen for the Fed and OCC said their agencies are committed to finishing the incentive-compensation rule. An FDIC spokesman declined to comment.” In addition to the Federal Reserve, the FDIC and the OCC, the SEC, the National Credit Union Administration and the Federal Housing Finance Agency (collectively, the Agencies) would have a vote on any new proposal.

The Wall Street Journal has suggested that discussions are being had at this time in order to finalize a rule under the current administration, in an effort to preempt the possibility of an even more onerous rule going into effect if the Democrats take control of the White House after the 2020 Presidential elections. A final rule on this topic is required under the Dodd-Frank Act.[1]

The latest proposed rule dates from the spring of 2016.[2] We are republishing our 2016 visual memo for those who would like a refresher, available here. There is a one-page cheat sheet on page six. An obvious question is the extent to which any re-proposal would, in light of the Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA), change the asset thresholds at which the rule requirements would apply. We expect that the asset thresholds would be change in some way, although it is unclear how.

The 2016 re-proposed rule would apply basic requirements to all institutions with $1 billion or more in total consolidated assets and was quite prescriptive for banking institutions with total consolidated assets of $50 billion or more, with additional requirements for banking institutions with total consolidated assets of $250 billion or more. For institutions with total consolidated assets of $50 billion or more, it would require:

Mandatory deferrals of specified percentages of incentive compensation (as high as 60%, depending on the size of the institution and the affected employee), for up to four years (depending on the size of the institution and the nature of the compensation arrangement);

A minimum clawback period of 7 years from the time of vesting of the incentive compensation; and

]]>Federal Banking Regulators Propose EGRRCPA-Conforming Amendments to Stress Testing Ruleshttps://www.finregreform.com/single-post/2019/01/22/federal-banking-regulators-propose-egrrcpa-conforming-amendments-stress-testing-rules/
Tue, 22 Jan 2019 21:50:34 +0000https://www.finregreform.com/?p=4405Continue Reading…]]>The Federal Reserve, FDIC and OCC (the Agencies) have each released proposed amendments to their respective stress testing rules for national banks, savings associations, state member banks and state non-member banks (collectively, IDIs) that would implement Section 401 of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the EGRRCPA) as it applies to supervisory and company-run stress testing requirements (the Proposals).[1] The Proposals generally address company-run stress testing requirements for IDIs, but certain elements of the Federal Reserve’s proposal also apply to bank holding companies (BHCs), covered savings and loan holding companies (SLHCs), U.S. intermediate holding companies of foreign banking organizations (IHCs) and any nonbank financial companies supervised by the Federal Reserve, and supervisory stress tests. The proposed amendments would apply to stress testing cycles beginning on January 1, 2020.

On October 31, 2018, the Federal Reserve also proposed rules that would tailor the enhanced prudential standards (EPS), including stress testing requirements, applicable to BHCs and covered SLHCs. For additional information on these proposed changes to supervisory and company-run stress tests for these firms, our visual memorandum on the Federal Reserve’s October 31 proposal is available here.

Asset Threshold for Company-Run Stress Tests

The Proposals would, as required by the EGRRCPA, revise the minimum threshold for IDIs required to conduct company-run stress tests from $10 billion in total consolidated assets to $250 billion in total consolidated assets.[2] Due to the revised asset threshold, the Proposals would also eliminate existing asset thresholds for the two sub-categories of IDIs with total consolidated assets from $10 billion to $50 billion and more than $50 billion.

The Federal Reserve’s Proposal would also revise its EPS tailoring proposal to clarify that a Category II or Category III SLHC would only become subject to company-run stress testing requirements in accordance with the applicable transition provision once the SLHC was subject to minimum capital requirements.

Frequency of IDI Company-Run Stress Tests and Transition Periods

Frequency

The EGRRCPA amended the Dodd-Frank Act requirement to conduct company-run stress tests from an “annual” basis to a “periodic” basis. To implement this change, the Proposals would require company-run stress tests for IDIs to be conducted every other year, in even numbered years, beginning on January 1, 2020. This proposed amendment would align the frequency of IDI company-run stress tests with the proposed frequency for BHCs and covered SLHCs in the Federal Reserve’s EPS tailoring proposal.

IDIs that are subsidiaries of U.S. GSIBs or BHCs or covered SLHCs that have more than $700 billion in total consolidated assets or cross-jurisdictional activity of more than $75 billion (i.e., Category I and II banking organizations under the Federal Reserve’s October 31 EPS proposal), however, would be required to conduct company-run stress tests on an annual basis, consistent with the requirement for their holding company to conduct annual company-run stress tests.

In addition, the requirement that boards of directors of IDIs must review and approve the policies and procedures of stress testing processes at least annually would be revised to require review and approval “no less than each year a stress test is conducted” in order to align the review process with the IDI’s stress testing cycle (i.e., annual or biennial, as applicable).[3]

Transition

An IDI that crosses the $250 billion asset threshold and becomes subject to company-run stress testing requirements for the first time in a given year would be subject to the requirements as of January 1 of the following year if it crosses the threshold between January 1 and March 31 of the given year. For an IDI that becomes subject to company-run stress testing between April 1 and December 31 of a given year, it would not be subject to company-run stress testing requirements until January 1 of the second year following the given year. This means, for example, that an IDI that exceeds $250 billion in total consolidated assets for the first time on April 1, 2023, would not be subject to company-run stress testing until January 1, 2026 (on the basis that, as the frequency for such an IDI would be biennial on even years, 2026 would be the first even year of applicability).

For an IDI already subject to two-year stress testing cycles that subsequently becomes subject to annual stress testing because its holding company becomes a Category I or Category II firm, the Proposals would not establish a similar transition period and the IDI would begin annual company-run stress testing as of the next year.

Elimination of the “Adverse” Scenario

The Proposals implement the EGRRCPA’s requirement to reduce the required number of economic scenarios in company-run stress tests from three to two by eliminating the “adverse” scenario and leaving the “baseline” and “severely adverse” scenarios. To accommodate this change, the Proposals would also revise the definition of the “severely adverse” scenario to define its greater severity relative to the “baseline” scenario rather than the “adverse” scenario.

In addition, the Federal Reserve’s Proposal would remove the “adverse” scenario and make corresponding conforming changes to the Federal Reserve’s company-run and supervisory stress testing requirements applicable to BHCs, covered SLHCs, IHCs and any nonbank financial company supervised by the Federal Reserve, as well as the Federal Reserve’s Policy Statement on the Scenario Design Framework for Stress Testing.

[2] Consistent with the existing text of Section 165(i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), the requirements would apply to IDIs with “more than” $250 billion in total consolidated assets.

[3] The Federal Reserve’s Proposal made the same conforming change to the company-run stress testing requirements applicable to BHCs, covered SLHCs and IHCs.

]]>Davis Polk Comments on FDIC’s Request for Information on FDIC Communication and Transparencyhttps://www.finregreform.com/single-post/2018/12/06/davis-polk-comments-fdics-request-information-fdic-communication-transparency/
Thu, 06 Dec 2018 23:25:09 +0000https://www.finregreform.com/?p=4312Continue Reading…]]>Davis Polk has submitted a comment letteron the FDIC’s Request for Information on FDIC Communication and Transparency. Our comment letter concentrates on ways in which we believe that the FDIC could improve its website, with a particular focus on how the FDIC’s efforts could educate users and ameliorate confusion by:

Providing background materials regarding the legal framework of the regulatory state

Reorganizing and clearly labeling its content consistent with the hierarchy of the legal framework

Adding information regarding foundational precepts of legal interpretation, such as the canons of construction and the principles of deference

Enhancing the website’s search and navigation functionality

Our comment letter draws heavily from an article recently published as a working draft by Margaret E. Tahyar entitled Legal Interpretation is Not Like Reading Poetry – How to Let Go of Ordinary Reading and Interpret the Legal Framework of the Regulatory State. That article aims to demystify the legal framework and legal interpretation for both newly minted digital native lawyers and for regulatory readers who have specialized knowledge or expertise but lack legal training, using the banking sector as a case study. The current draft is available here.